US Federal Reserve Raises Interest Rates

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The most telegraphed US rate rise in history is expected to provoke bigger moves on financial markets than what’s been seen so far.

The federal funds rate today rose a quarter of a percentage point to a range between 0.25 per cent and 0.5 per cent. The Australian dollar’s reaction to the US Federal Reserve’s first rate hike in almost a decade was fairly muted, while the local share market rallied.

But Commonwealth Bank of Australia economists predict a stronger response to play out over the next few days.

“We haven’t yet seen the full reaction, partly because a lot of market participants around the globe were closed for business given the time zones,” CBA chief economist Michael Blythe said.

CBA’s head of international economics Richard Grace said the biggest moves will be in the 24-hour period kicking off in the Asian Monday morning, once traders have digested the news over the weekend.

Mr Grace tipped equity markets to soften over the next three trading days, saying volatility may pick up.

“(And) I think the market reaction to the second Fed funds rate hike, which we think will be in March, will be larger than the one we’ve seen now,” he said.

Mr Blythe said the Fed barely changed its interest rate forecasts, proving it was more hawkish than people were expecting. “The market is underestimating what the Fed means by ‘gradual’,” he said.

“It’s the start of a tightening cycle. We think it’s going to be another three (hikes) over the next 12 months.” Mr Grace predicted the Fed hike to boost the greenback over the next six months before the impact of higher interest rates and a firmer currency are felt in the economy.

He said Thursday’s hike was a good sign of confidence in the US economy and global growth, which could support the Aussie.

“When the world’s largest economy is raising interest rates the Australian dollar typically outperforms the other currencies, even if (it) comes down against the US,” Mr Grace said.

But Mr Grace said downward pressure on commodity prices will accelerate once the greenback gains more ground.

“Eventually that will weigh on the Australian dollar and we’ll see it brought down,” he said.

The Aussie has lost a third of its value in the past two years, mostly because of speculation the Fed would hike its rate.

Aussie shares rally, opening up opportunity Australian shares rallied for a second straight day as investors welcomed the first rise in US interest rates in almost a decade.

The ASX jumped 1.5 per cent on top of two per cent increase on Wednesday, raising hopes that the battered S&P/ASX200 will finish the year close to its 2014 closing level of 5,411.

“We’ve got positive momentum now,” said CMC Markets chief market strategist Michael McCarthy.

“We will build towards the top of the trading range and we’ll finish somewhere between 5,300 and 5,400.” Inspired by a positive Wall St response to the US Federal Reserve’s decision to raise interest rates by 0.25 percentage points from near zero, the local bourse soared nearly two per cent during today’s session.
Healthcare, utilities and IT stocks led the drive up, while the telcos and financials also performed strongly.

Telstra ended two per cent higher, while the big four banks also rose by a similar level.

The gains add to hopes that the market will enjoy a Santa Claus rally before investors unwrap their presents on Christmas Day. “Markets had been on tenterhooks ahead of this Fed’s meeting and now that’s out of the way I think investors have realised that the hike’s not as bad as been feared,” said AMP Capital chief economist Shane Oliver.

“They’ve realised it’s a sign that the US ecosystem is stronger, and future hikes by the Fed will be gradual and conditional on continued improvement in the US economy.” Dr Oliver said buyers could now pile into the discounted Australian market, which saw massive sell-offs in August and October.

“Compared to alternative investments like cash and bonds, the sharemarket is quite cheap,” he said.

US rate hike rallies global markets. Seven years to the day after lowering the rate to near zero, members of the policymaking Federal Open Market Committee edged it up 0.25 percentage points.

The increase led to a classic “sell the rumour, buy the fact” pattern in the share market.

Investors had long antedated the rate rise and had done all their precautionary selling beforehand.

Even before the Fed broke the news, the market had already started a rally which was only briefly interrupted by the announcement itself.

“Given the economic outlook, and recognising the time it takes for policy actions to affect future economic conditions, the committee decided to raise the target range for the federal funds rate 0.25 to 0.5 per cent,” the FOMC’s post-meeting statement said.

“The stance of monetary policy remains accommodative after this increase, thereby supporting further improvements in labour market conditions and a return to two per cent inflation.”

The median projection by the FOMC foresees that rate at about 1.4 per cent at the end of 2016, suggesting three or four more increases through next year.

In the final hour of trade, the Dow Jones industrial average was up 250.10 points, or 1.43 per cent, to 17,775.01, the S&P 500 gained 31.81 points, or 1.5 per cent, to 2,074.21 and the Nasdaq Composite added 79.37 points, or 1.59 per cent, to 5,074.41.

The biggest gainers were utilities and telecommunications stocks, which rose 2.4 per cent and 1.7 per cent, respectively.

The foreign exchange market reaction was anything but extreme.

Late Thursday morning, the US dollar had made some minor gains against the yen and the euro.

The bond market didn’t react much. The yield on the 10-year Treasury note rose slightly to 2.29 percent.

European shares rose today while Asian markets surged. The pan-European FTSEurofirst index ended up 0.3 per cent higher, while the Nikkei 225 index at the Tokyo Stock Exchange jumped 2.15 percent, or 409.67 points, to 19,459.58 in early deals, after surging 2.61 percent a day earlier.

China’s blue-chip CSI300 index rose 1.7 per cent, to 3,748.45 points by midday, while the Shanghai Composite Index gained 1.5 per cent, to 3,568.68 points.
The Hang Seng index added 1.0 per cent, to 21,906.35 points while the Hong Kong China Enterprises Index gained 1.8 per cent, to 9,712.30.

Five things you need to know about the US rate hike:

WHAT HAPPENED?
In a widely anticipated move, the US Federal Reserve raised its interest rate for the first time in almost a decade.
The federal funds rate rose a quarter of a percentage point to a range between 0.25 per cent and 0.5 per cent.
By comparison Australia’s cash rate is at record low two per cent.

WHY?
In 2008, at the onset of the global financial crisis, the Fed slashed its interest rate to near zero from 3.5 per cent in an attempt to stimulate the economy.
After creating 5.5 million jobs in two years, the US economy is emerging from the “great” recession and is expected to grow in the year ahead.
That allows the Fed to raise its interest rate from emergency levels to more normal ones to help keep inflation under control.

WHAT DID THE AUSSIE DOLLAR DO?
It fell after the Fed’s announcement, bottoming out at 71.77 US cents, but then bounced above 72 US cents.
The Aussie has lost a third of its value in the past two years, mostly because of speculation the Fed would hike its rate.
AMP Capital chief economist Shane Oliver said the dollar’s muted reaction was because the Fed said any further increases would be gradual.
“With the Fed undertaking a dovish rate hike there is a risk that a further fall in the Australian dollar will be further delayed,” he said.

AND THE AUSTRALIAN SHARE MARKET?
It surged because traders saw the decision to raise the US interest rate as a positive.
“The market is reacting well to the Fed’s decision, which reflects the strength in the US economy,” IG’s market analyst Angus Nicholson said.

WHAT ABOUT AUSTRALIAN INTEREST RATES?
Another cut looks less likely after two months of strong local jobs figures.
Dr Oliver said if the Fed’s rate hikes are gradual, then the RBA might need to cut again to help push
the Australian dollar lower to stimulate the economy.
But if the Fed becomes aggressive with its rate rises the Aussie could fall to around 60 US cents next year, making an RBA rate cut less likely.
The RBA last lifted rates in November 2010, while its most recent cut was in May this year.

 

Author: Network Writers, AAPNews Corp Australia Network

Source: HTTP://WWW.NEWS.COM.AU/FINANCE/US-FEDERAL-RESERVE-RAISES-INTEREST-RATES/NEWS-STORY/00E170643B03A7ACD6488C7879FA921D